Pull out and look at your contract with your Chinese counter-party. Does it have a force majeure clause? If it does not, put it away and count yourself lucky. If it has a force majeure clause, pour gasoline or lighter fluid or nail polish all over it and light it.
JUST KIDDING.
Well only sort of. Chinese companies love using force majeure provisions in their contracts and American and European companies consistently let them, to their detriment.
Chinese companies love using China-style force majeure provisions to take advantage of foreign companies unfamiliar with Chinese law. Our China lawyers (mostly our China contract and dispute resolution lawyers) see this all the time. It is common for international contracts to include a force majeure provision, but those proposed by Chinese companies are anything but standard.
Wikipedia does a good job explaining the whys and the hows of standard force majeure provisions:
Force majeure, meaning “superior force”, also known as cas fortuit (French) or casus fortuitus (Latin) “chance occurrence, unavoidable accident”, is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, war, strike, riot, crime, or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.
Force majeure is generally intended to include occurrences beyond the reasonable control of a party, and therefore would not cover:
Any result of the negligence or malfeasance of a party, which has a materially adverse effect on the ability of such party to perform its obligations.
Any result of the usual and natural consequences of external forces.
To illuminate this distinction, take the example of an outdoor public event abruptly called off.
If the cause for cancellation is ordinary predictable rain, this is most probably not force majeure.
If the cause is a flash flood that damages the venue or makes the event hazardous to attend, then this almost certainly is force majeure, other than where the venue was on a known flood plain or the area of the venue was known to be subject to torrential rain.
Some causes might be arguable borderline cases (for instance, if unusually heavy rain occurred, rendering the event significantly more difficult, but not impossible, to safely hold or attend); these must be assessed in light of the circumstances.
Any circumstances that are specifically contemplated (included) in the contract—for example, if the contract for the outdoor event specifically permits or requires cancellation in the event of rain.
Under international law, it refers to an irresistible force or unforeseen event beyond the control of a state making it materially impossible to fulfill an international obligation, and is related to the concept of a state of emergency.
The above is all true, but for China, not so much.
Chinese companies LOVE force majeure provisions that put all of the risk on the foreign company by being broad enough for just the Chinese company to drive a truck through.
Let me explain. . . .
Our China contract lawyers often see contracts with force majeure provisions that essentially excuse the Chinese company’s failure to pay its foreign party counter-party for pretty much any reason. By way of an example, a European company once came to us after having sold a large amount of foodstuffs to China and not getting paid. The European company wrote the Chinese company regarding its failure to pay. The Chinese company responded by saying, “sorry, but the Bank of China will not allow us to send you the money.” The European company wanted our international litigation lawyers to help it determine whether to pursue litigation or not. Our answer was that the contract’s force majeure clause would make litigation extremely risky.
The European company had used its regular domestic lawyer to review this contract and this lawyer had used our blog (we get this surprisingly often) to determine that the contract calling for disputes to be resolved in a Chinese court would be okay. Having your disputes with a Chinese company resolved in a Chinese court usually does make sense, but not always. In this case, the provision did actually make sense and, standing alone, was not the problem with the contract.
The problem with the contract was that the lawyer who agreed to the disputes being resolved in a Chinese court did so without knowing a thing about Chinese law. The problem with the contract was that under Chinese law, the Chinese side was greatly favored. Our advice to this European client was what our advice so often is when our lawyers are tasked with analyzing a Chinese contract gone wrong: we suggested our client retain counsel in its own country to explore pursuing a malpractice action against their lawyer who had failed to warn them about the contract they would sign because he worked on a contract for China without knowing the first thing about China law. See Worthless China Contracts: First, Let’s Sue All The Lawyers.
The big problem with this specific contract was its force majeure provision which said that the Chinese company’s failure to pay the European company due to a bank or government not granting it the approval to make such payments would be treated as a force majeure event that would excuse the Chinese side from paying. This same provision even said that if the Chinese company could not pay the European company for force majeure reasons, the European company would not be permitted to terminate the contract. So arguably, the Chinese company could legally require the European company to keep shipping foodstuffs to China and keep not paying for them.
And guess what, this sort of force majeure provision is common.
A force majeure provision that requires one side to perform even though no payment is made by the other side is not standard force majeure. But since force majeure is so often viewed as just boilerplate, it is often not read carefully or understood by lawyers not fluent in Chinese and not experienced with China.
The key to a standard force majeure provision is that the force majeure event means neither party is required to perform; if the force majeure condition continues, the affected party is required to return the matter to the pre-contract status quo. But in Chinese contracts these provisions are often written to turn the standard force majeure provision upside down by providing that if the Chinese government or its agents make performance by the Chinese side impossible, the Chinese side is not obligated to perform but the foreign party is still obligated to perform and the Chinese side is not obligated to return the matter to its pre-contract status quo.
We also often see contracts that say one thing for force majeure in the Chinese language portion of the contract and something very different in the English language portion. Because the Chinese language portion of the contract inevitably will control, the foreign company literally does not have a clue as to what it has signed. See Dual Language China Contracts: Don’t Get Fooled! When this happens, the Chinese language portion will greatly favor the Chinese side and the English language portion will be much more neutral.
Force majeure provisions are often included in contracts to free a party from a legal obligation when an extraordinary event or circumstance occurs. For example, if party A agrees to sell Party B a car but the day before the before the sale goes down the car is stolen, Party A will almost certainly not be held liable for not selling the car due to a force majeure provision. Example 2, if Party A contracts to make 100,000 widgets for Party B but a war breaks out and Party A must abandon its factory and therefore cannot make the widgets, Party A will almost certainly not be held liable for having provided the 100,000 widgets due to a force majeure provision. These examples rightly color how Western companies view force majeure provisions.
This though is not how Chinese companies and often the Chinese court view force majeure provisions. For example, if you enter into a contract that requires your Chinese counter-party to pay you $5 million dollars to license your technology and your Chinese counter-party is then blocked by the Chinese government from sending you the $5 million because your licensing agreement was never filed with the Chinese government and the Chinese government never approved your Chinese counter-party sending out $5 million in hard currency, you should expect your Chinese counter-party to claim force majeure. What will then happen if you have to sue your Chinese counter-party in a Chinese court? Even though everyone knows it can be difficult for Chinese companies to get money out of the country and even though the Chinese company could have planned so as to be able to get the money out (which essentially should negate its ability to rely on a force majeure defense), you will be in for a tough fight and you very well might lose.
The real problem with these provisions is that Chinese companies interpret the provision in a way that is completely different from the standard legal interpretation. The standard approach is that the impact of force majeure is: a) the contract is terminated, b) the parties are taken back to their position that prevailed before the contract was executed and c) the party invoking force majeure is liable for the costs of the other party resulting from going back to that pre-contract status. Chinese companies interpret in an entirely different way. In the Chinese interpretation, when the invoke force majeure, they are not obligated in any way BUT the other party is still obligated to perform. That is, if a payment is required but is blocked by the Chinese government, the Chinese side does not have to pay but the foreign side still has to perform. Moreover, any costs incurred by the foreign side are not reimbursed.
This is “force majeure with Chinese characteristics”. The position is not consistent with law and is completely unacceptable as a commercial matter. But this is always what the Chinese side means when they include a force majeure provision in their contracts. It looks like boiler plate, and most lawyers just ignore the provision. But the real intent is to set a trap for the unwary. You should not fall into this trap. It is important that you either strike any force majeure provision entirely from your contracts with Chinese companies or — better yet — draft the force majeure clause to include all the provisions required to make it reasonable under standard international commercial law. That is, you have to go beyond a definition of what is or is not force majeure. You must spell out specifically the procedure for invoking force majeure and the result. Those results will depend on the specific nature of the underlying business deal. Note also that most Chinese companies are seeking to use force majeure so that they can escape from the impact of arbitrary actions on the part of their government. Parties should recognize that arbitrary government action is now common in the international trade system. Dealing in a practical way with the impact of those decisions is now an essential component of all trade deals. The old practice of just throwing in a bolier plate standard term will no longer serve a useful purpose.
If you are thinking that you can solve the China force majeure problem by having your contract provide for disputes to be resolved before a court or arbitration panel in your home country, you would probably be wrong. Chinese courts almost never enforce foreign judgments and they also can choose not to enforce foreign arbitration awards on public policy grounds. So even if you choose a foreign court or a foreign arbitration, you will almost certainly need to confront the force majeure issue at some point in a Chinese court.
Bottom Line: Beware of “force majeure with Chinese characteristics” provisions in your contracts with Chinese companies.
